FMP Taxation


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FMP Taxation benefits are a key reason why FMPs are often preferred by HNIs


FMP Taxation BenefitsHigh Networth investors in India are often people who can afford to get the best investment advice. It is not surprising that HNIs and nowadays even retail investors are increasingly prefering FMPs as a debt investment vehicle. The key reason for preferring Fixed Maturity Plans are the inherent tax benefits in FMPs.

Indexation is a key reason why FMP taxation rules offer tax benefits to investors

Inflation adjusted indexation benefits ensure that FMPs have a better post tax return compared to other fixed income investments such as bank FDs. In our comparative study on FMPs vs Bank Fixed Deposit (FD) returns and tax benefits, we demonstrate how a lower pre-tax return from FMP can often end up in a much higher post tax return compared to bank FDs.

FMP Mutual funds can even offer additional taxation benefits in terms of post tax returns if held over 2 calendar years

One key aspect of FMPs taxation benefits is double indexation. Tax benefits can be enjoyed for 2 years even if the Fixed maturity plan is just held for slightly more a year

For better explanation of double indexation, consider a case of an investor buying a 370 day FMP on March 30 2011 and selling it on Apr 5 2012. Though the fixed maturity plan is held for only 370 days, the taxation benefits due to double indexation are enjoyed over two years

It is quite clear that FMP returns definitely have taxation advantages over many other fixed income instruments

Do the taxation benefits in FMPs mean that you should blindly invest in FMPs for better post tax returns? Of course not, the usual research on the mutual fund, past performance of the mutual fund manager, need for liquidity , expected returns, your risk profile and other checks should guide your decision

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